TECHNOLOGY; Amazon.com Earnings Disappoint Investors

By LAURIE J. FLYNN

Published: February 3, 2005

Amazon.com, the online retailer, said yesterday that its sales rose 31 percent in the fourth quarter, helped by a tax benefit, but its earnings disappointed investors growing concerned about increased competition and rising expenses.

Amazon.com, based in Seattle, reported net income of $346.7 million in the quarter, or 82 cents a share, including a $244 million gain from a tax benefit. The company had a profit of $73.2 million, or 17 cents a share, in the fourth quarter of 2003.

Excluding the tax benefit and other items, the company said earnings would have been $149 million, or 35 cents a share, short of analysts' forecast of 40 cents a share, according to Thomson First Call.

''We felt very good about the growth and from a bottom line perspective we were in line with our guidance,'' the chief financial officer, Tom Szkutak, said in a conference call with analysts yesterday.

Net sales were $2.54 billion in the fourth quarter, an increase of 31 percent from a year ago, when net sales were $1.95 billion. That was at the high end of Amazon.com's sales forecast of $2.30 billion to $2.55 billion, which the company provided in October. Excluding the benefits from changes in foreign exchange rates, sales rose 26 percent.

Operating profits, as a percent of revenue, declined to 7 percent, from 7.9 percent a year earlier, reflecting higher marketing costs and operating expenses.

''I think it's getting a lot more expensive for Amazon to compete,'' said Mark Mahaney, an analyst at American Technology Research.

Shares in Amazon fell as much as 15 percent in after-hours trading. Before the company released its earnings report, shares of Amazon declined 60 cents, to close at $41.88.

Safa Rashtchy, an analyst with Piper Jaffray, said he was concerned that Amazon did not have more to show for all its investment in marketing programs, like its free shipping program.

''There's a lack of clarity of why they are spending all that they are,'' said Mr. Rashtchy, whose company has a neutral recommendation on Amazon stock. ''My guess is that the competitive pressure must be intense.''

The company is facing strong competition on many fronts, including from the online arms of traditional businesses like Wal-Mart Stores.

For all of 2004, Amazon had earnings of $1.39 a share on revenue of $6.92 billion. That compares with 2003 earnings of 8 cents a share on revenue of $5.26 billion.

Looking ahead, Amazon.com raised its revenue forecast for 2005, but warned investors that operating profits could suffer in part because of a free-shipping promotion introduced yesterday, and other expenses.

Amazon forecast revenue of $1.8 billion to $1.95 billion, an increase of 18 percent to 27 percent. The company forecast that sales for the year would be $8.05 billion to $8.65 billion, an increase of 16 percent to 25 percent.

The company also announced it would redeem convertible notes with a face value of $261 million next month, part of its program to retire $500 million in debt.

Earlier in the day, the company announced a flat-fee shipping membership program offering customers unlimited two-day shipping for a single annual fee of $79.

Participants in the program, called Amazon Prime, are eligible for overnight shipping for $3.99 an item. Amazon has offered free shipping on orders valued at $25 or more since January 2003, but products shipped that way typically take 8 to 10 days to arrive.

Jeffrey P. Bezos, the company's founder and chief executive, said he hoped the program would bring in sales by removing the complexity of shipping. ''The primary effect we hope to see from it is more frequency across categories,'' Mr. Bezos said. ''It's about earning more of the business from current customers.''

But Mr. Bezos warned that the program would be expensive, much like the company's free shipping program, which cost the company an additional $6 million in the quarter compared with a year earlier.

Mr. Bezos said the company had a profit of $12 million from shipping during 1999, while it lost $197 million on shipping in 2004. In the fourth quarter, the company lost $78 million in shipping costs.

The company continued to see some of its strongest growth in overseas markets. North American sales rose 22 percent, to $1.39 billion, in the quarter, while international sales rose 43 percent, to $1.15 billion.

The company began an online DVD-rental business in Britain, fueling speculation that the company is about to enter the American market and compete with Netflix. Mr. Bezos declined to comment directly on whether the company planned to enter that market anytime soon.